Freddie Mac says it may sue over plan to seize underwater loans

Richmond, Calif., which was hit hard by the mortgage crisis, announced last week that it had asked the holders of more than 620 underwater mortgages to sell the loans to the city at a discount. Above, Richmond homes.
(Justin Sullivan / Getty Images)

The Bay Area city of Richmond had best prepare for legal warfare if it proceeds with its plan to use eminent domain to seize the mortgages of residents who owe more than their homes are worth, housing finance giant Freddie Mac warned.

The city has asked the holders of about 620 underwater mortgages to sell the loans to the city at a sharp discount from face value. Richmond hopes to refinance the loans for amounts reflecting current home values, lowering the residents’ payments and encouraging them to remain in the blue-collar city.

It said it would exercise its eminent domain powers – typically used to buy blighted real estate for public improvements – if the holders of the loans did not agree to the deal.

During an earnings call with analysts Wednesday, Freddie Mac General Counsel William McDavid questioned not only the use of eminent domain to purchase troubled loans but the notion that the holders of the loans would be selling them voluntarily.

“They’re loan sales under pressure – in fact, under a threat of seizure by eminent domain,” McDavid said. “We would consider taking legal action.”


Freddie Mac and its sister company, Fannie Mae, buy and guarantee home loans, and also have large investments in securities that are backed by payments on bundles of mortgages. They could be harmed if the eminent domain plan reduced the value of these bonds.

Reeling near collapse, Fannie and Freddie received $187 billion in federal bailout funds beginning in 2008 and remain under U.S. government control, although they have returned to profitability. Debate is underway in Washington on how to phase them out without undermining the housing markets.

The use of eminent domain to seize home loans was first proposed last year by San Bernardino County and two of its cities, Ontario and Fontana. But they backed off in the face of powerful opposition from the financial industry.

El Monte, a Los Angeles suburb, also is considering using eminent domain to seize underwater loans.


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